Working Paper: CEPR ID: DP8905
Authors: Viral V. Acharya; Marco Pagano; Paolo Volpin
Abstract: We present a model of labor market equilibrium in which managers are risk-averse, managerial talent (?alpha?) is scarce, and firms seek alpha, that is, compete for this talent. When managers are not mobile across firms, firms provide efficient long-term compensation, which allows for learning about managerial talent and insures low-quality managers. In contrast, when managers can move across firms, high-quality managers can fully extract the rents arising from their skill, which prevents firms from providing co-insurance among their employees. In anticipation, risk-averse managers may churn across firms before their performance is fully learnt and thereby prevent their efficient choice of projects. The result is excessive risk-taking with pay for short-term performance and build up of long-term risks. We conclude with analysis of policies to address the resulting inefficiency in firms' compensation.
Keywords: executive compensation; managerial talent; managerial turnover; short-termism
JEL Codes: D62; G32; G38; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competitive pressure in the managerial labor market (J29) | Excessive risk-taking by managers (G34) |
| Managerial churn (J63) | Excessive risk-taking driven by short-term performance incentives (G41) |
| Reduced competition (L49) | Better talent management (M54) |
| Better talent management (M54) | Lower risk-taking (D81) |